ECB would monitor bankers’ bonuses in oversight plan

ECB bank supervision plan would allow oversight of bonuses

The European Central Bank would get power to oversee bankers’ compensation under draft legislative proposals to establish the ECB as a bank supervisor.

The Frankfurt-based institution would get the power to monitor risk management, capital standards and “remuneration policies and practices,” according to the draft dated Tuesday. The blueprint also says the ECB would be able to carry out stress tests and “where appropriate publish the results.”

EU banking supervisors would send decisions to the ECB’s Governing Council for an up-or-down vote under the new draft, which builds on previous efforts to clarify how participating non-euro nations could take part in bank oversight decision. The draft says supervisory board leaders would not have to be Governing Council members and it lays out conditions in which the central bank’s top panel could exercise an oversight veto.

European Union officials will discuss the proposal this week as they push to design a framework by the end of the year for a euro-area bank supervisor. Leaders last week renewed their commitment to give the ECB oversight powers over all banks in the 17-nation currency union as well as in other nations that choose to participate.

Related

Joint supervision is the cornerstone of the EU’s plan to create a banking union as a weapon against the debt and financial crisis headed for its fourth year. Once the ECB takes the role, which could happen as soon as Jan. 1, the euro area will be able to consider allowing direct bank bailouts from its 500-billion-euro (US$648-billion) firewall fund.

While it would be mandatory for euro-area nations to place their banks under ECB supervision, EU states outside the bloc could voluntarily sign-up to the plan.

The EU is simultaneously trying to agree on how it will implement the so-called Basel III capital accords, a global pact on risk management. Banker bonuses have become a touchstone in that effort, as EU lawmakers press for explicit bonus curbs as a condition of allowing capital rules to proceed.

Today’s draft offers details on which banks the ECB would supervise day-to-day and which tasks would stay with national supervisors. It reiterates that the ECB will have access to information concerning all banks in the currency zone and could assume regulatory control of any bank in participating nations “at any moment” if conditions warrant.

Cyprus Draft

Banks that are systemically important or have already received European bailouts would be supervised directly by the central bank, says the draft legislation, prepared by Cyprus in its role holding the EU’s rotating presidency. National regulators would “carry out regular operational tasks” for all other banks, the draft says.

National regulators would have explicit rights to accompany the ECB on bank inspections, the draft says.

The revised plan seeks to address non-euro-area nations’ concerns that they would lack a voice in the ECB because they can’t join the central bank’s governing council.

Under the proposals, decisions taken by the ECB’s supervisory board would be automatically adopted unless rejected by the governing council within a pre-agreed deadline.

The supervisory board, in which participating non-euro-area nations would have a seat, would also carry out “full preparatory” work on oversight decisions.

The draft also calls for a strict division of staff in the ECB working between those working on monetary policy and those handling oversight tasks.

Bankers are facing a backlash from European Parliament lawmakers determined to cut variable pay as part of a quest to reshape lenders as utilities rather than money-making machines.

Fixed Pay

The assembly has called for a ban on bonuses that exceed fixed pay, arguing that existing curbs have failed to prevent bankers from taking excessive risks or being rewarded for failure.

The proposed ban has become a sticking point between governments and lawmakers in talks over an overhaul of the bloc’s financial regulation which governments have said should take effect at the same time at the ECB’s oversight powers.

In other changes, the draft lays out timing guidelines for non-euro nations to enter or leave the supervisory system.

The revised plans include a three-year ban on nations that leave the system from rejoining.

The text also adjusts draft voting rules for the European Banking Authority, which drafts financial rules across the 27-nation EU and has some power to settle disputes between regulators.